Why Optimizing Scale is more Important than Maximizing Growth.
Despite the vast amount of content available on the subject of growth, there is one major aspect of it that is often neglected: the ‘drag’ effect that becomes palpable when growth is poorly managed. Mismanaging growth results in inefficiencies that draw resources away and tend to slow down growth. A company’s ability to manage growth therefore sets a glass ceiling that limits how big and how fast it can grow. While generating growth is a critical ingredient of success, managing growth is equally important because organizations inherently tend to become less efficient as they scale. We often tend to confuse scale with growth but they are in fact two different sides of the coin. In an ideal world, we would be able to increase growth while decreasing scale. In the real world, we usually need to scale up operations to keep up with demand and generate growth. Diminishing marginal returns are natural though, which is why managing growth well is essential to sustaining long-term growth.
Scale vs. Growth
In this sense, company building requires the development of two systems: the relationship between inputs and operations (system 1), and the relationship between operations and market impact (system 2). System 2 can scale super-linearly. Meaning that as the organization increases in size, its impact on the market can increase even faster. For more on this, read: On self-reinforcing competitive advantages. System 1, on the other hand, tends to scale sub-linearly, meaning that as organizations scale the amount of inputs needed to scale operations grows at an increasingly faster rate. This happens because communication and coordination become more difficult; interdepartmental dependencies slow down work; HR and legal due diligence adds additional overhead. The list goes on. Looking at it in a different way, the proportion of the inputs available that are required for maintenance and non-core business operations grows larger as the organization scales. For more on this, read: Scale by Geoffrey West. The strong sub-linear scaling tendency of System 1 means that most organizations have a natural growth cap. At a certain point, any increase in inputs becomes almost entirely absorbed by maintenance, leaving little to spare for incremental core operations and subsequently for growth.
Let’s assume that your company is already experiencing monthly revenue growth north of 5%. How do you balance the task of sustaining that level of growth with putting out the fires that inevitably come up? The simplest and fastest solution usually involves throwing money at the problem, typically by hiring more people. This may work in the short term, but it can also aggravate the situation down the road and lower your long-term prospects. Proactively managing growth helps to avoid this sort of situations. To be clear, I’m not advocating for slow growth but rather for a mindful approach to growth. When the needle enters the red zone, short-term gains come at the cost of the engine itself. Where that red zone begins depends on variables such as the market, the business model, and the team.
The flip side to this argument is the mantra that growth is an end in itself because “growth solves all problems”. Rapid growth will certainly improve access to capital, as well as your ability to attract talent and media attention, and while all that can be hugely beneficial, if you pursue this strategy, you risk having to cut corners to keep up with short-term needs at the expense of long-term growth. With a few exceptions, company building is a marathon, not a sprint, so unless you are chasing growth-based valuation, are in a clear winner-take-all market, or have evidence of a self-reinforcing competitive advantage, avoid spending a major part of your resources fuelling short-term growth, and focus instead on building for the long term.